Icahn to Yahoo board: Sell to Microsoft or leave

"There's a strong feeling that Yang and the board did not do their fiduciary duty," Chervitz said. "They had a very strong offer on the table and did everything to brush it aside, if not sabotage it."

Paulson & Co., a New York hedge fund that owns 50 million Yahoo shares, said Thursday that it will back Icahn's alternate slate of directors if Yahoo's board doesn't negotiate a sale to Microsoft.

Icahn has a long history of challenging corporate boards overseeing troubled companies. Most recently, he has forced major changes at Blockbuster Inc. and Motorola Inc. He also played a pivotal role in the recent $8.5 billion sale of business software maker BEA Systems Inc. to rival Oracle Corp., which dropped an earlier bid of $6.7 billion.

The billionaire investor's other notable nominees to the Yahoo board include: venture capitalist Adam Dell, whose brother, Michael, founded Dell Inc.; and Frank Biondi Jr., the former chief executive of Viacom Inc.

Icahn also recruited two nominees that Microsoft reportedly lined up for a possible hostile takeover attempt that never materialized. Those two are advertising executive Edward Grey and former Nextel Partners CEO John Chapple.

The revolt threatens to jettison Yang, 39, from the company that he started with Filo, 41, while they were graduate students at Stanford University 14 years ago. Together, Yang and Filo still own 134 million Yahoo shares, or nearly 10 percent of the company.

Yang has argued Yahoo eventually will be worth more than Microsoft's last offer if it can expand its share of a rapidly growing Internet advertising market. He has pledged to boost Yahoo's net revenue growth by 25 percent in 2009 and 2010 -well above the company's recent pace of 12 percent.

"It is irresponsible to hide behind management's more than overly optimistic financial forecasts," Icahn wrote Bostock.

Although Ballmer and other Microsoft executives have been saying publicly they don't need to buy Yahoo to bolster the company's unprofitable Internet operations, many analysts have dismissed the statements as posturing.

Collins Stewart analyst Sandeep Aggarwal believes Microsoft will eventually buy Yahoo for $33 or $34 per share. The "body language from Yahoo and Microsoft do not suggest that both companies have really moved on," Aggarwal wrote in a Thursday research note.